Lecture 5 Monopoly and Monopolistic Competition

Lecture 5 Monopoly and Monopolistic Competition - Lecture 5...

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1 Lecture 5 Monopoly and Monopolistic Competition EC1101E Introduction to Economic Analysis
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2 Lecture Outline 1. Monopoly - Characteristics (Barriers to entry) - Total revenue and marginal revenue - Monopolist’s output decision - Monopoly vs perfect competition - Costs of monopoly to society as a whole - Rent seeking (Patents) - Price discrimination 2. Monopolistic Competition - Effects of market entry - Characteristics (Product Differentiation) - Short-run and long-run - Monopolistic competition vs perfect competition
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3 Monopoly - Definition and Characteristics A monopoly is an industry or market in which there is a single supplier of a good , service, or resource, that has no close substitutes and in which there are barriers preventing the entry of new firms. Has market power which is the ability to affect the price of the product – a “ price setter ”. Occurs when there are barriers that prevent more than one firm from entering the market.
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4 Barriers to Entry Artificial barriers to entry - resulting from laws or government regulations. Examples: Patent - Granted by the government, giving an inventor an exclusive right to sell a new product for some period of time. Government implicitly grants monopoly power Franchise or licensing scheme – ie., Government designates a single firm to sell a particular good.
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Barriers to Entry Natural barrier to entry – Natural Monopoly occurs when the scale economies in production are so large that only a single firm can survive. 5
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6 Total and Marginal Revenue
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7 Total and Marginal Revenue
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8 Total and Marginal Revenue The firm must reduce the price to sell more. For all but the first unit sold, the marginal revenue is less than the price. Marginal revenue (MR) equals the price minus the revenue lost on previous units sold at a lower price.
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Total and Marginal Revenue Curve 9 Marginal revenue Monopolist's demand (Market demand) g k For this first unit sold, MR = P. 1 b f j To sell this second unit, the firm reduces the price for this unit and the first unit 2 c Therefore, beyond the first unit, MR < P and MR curve lies below demand curve 3 h Below 4.5 units: Total revenue is rising, MR > 0 4 At 4.5 units: Total revenue is rising, MR = 0 5 Above 4.5 units: Total revenue is rising, MR < 0 6 6 Quantity of units sold 1 0 2 3 4 5 2 4 6 8 10 12 $14 − 2 − 6 Price or marginal revenue d i e
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10 Monopolist’s Price and Marginal Revenue A monopolist faces the market demand curve which is downward-sloping. To sell more, it must reduce its price, so marginal revenue is less than price. The MR curve lies below the demand curve.
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Monopolist’s Output Decision A single-price monopolist Produces the quantity at which marginal cost equals marginal revenue.
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This note was uploaded on 02/12/2012 for the course ECON EC1101 taught by Professor Ms during the Spring '08 term at National University of Singapore.

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Lecture 5 Monopoly and Monopolistic Competition - Lecture 5...

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